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Inner city house turned commercial... Anyone with experience?
- Thread starter wallace
- Start date
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Who Replied?What's the zoning?
Yes but why would you bother? For me, I would only do it if the commercial rental I get is massively higher than an equivalent resi one. This is because as soon as it is commercial its value is crunched by a higher capitalisation rate which can only be counteracted by a much higher rent.
Yes but why would you bother? For me, I would only do it if the commercial rental I get is massively higher than an equivalent resi one. This is because as soon as it is commercial its value is crunched by a higher capitalisation rate which can only be counteracted by a much higher rent.
Hi Aaron,
Could you explain that. Higher capitalisation?
Hi Aaron,
Could you explain that. Higher capitalisation?
Sure. Consider a property that can be rented out either as resi or commercial, both at $100,000 pa.
Resi properties are valued by comparable sales and rental yield is generally not that important, particularly for inner-city residences. In an inner city area a yield of only 3% may be acceptable - in which case the property is worth $3.3m as a resi security.
Contrast that with commercial - rental yield is everything as commercial properties only exist to make money. The capitalisation rate is the required yield on the property that an investor needs to purchase it. You divide the rental by the capitalisation rate to get the value. Since the security is used for commercial purposes, the capitalisation rate will go up so it will be more than the 3% for a resi property. Perhaps it will be 5%. In which case the value of the property is now only $2m ($100,000 / 5%). So you've lost a massive amount of value - plus your property will be gutted out by the commercial tenant since they need space for offices/shop etc.
To make the commercial security equivalent to the resi one with that cap rate, the commercial rental has to be about $170,000 pa. Is that achievable? If not, then it is a bad idea.
Sure. Consider a property that can be rented out either as resi or commercial, both at $100,000 pa.
Resi properties are valued by comparable sales and rental yield is generally not that important, particularly for inner-city residences. In an inner city area a yield of only 3% may be acceptable - in which case the property is worth $3.3m as a resi security.
Contrast that with commercial - rental yield is everything as commercial properties only exist to make money. The capitalisation rate is the required yield on the property that an investor needs to purchase it. You divide the rental by the capitalisation rate to get the value. Since the security is used for commercial purposes, the capitalisation rate will go up so it will be more than the 3% for a resi property. Perhaps it will be 5%. In which case the value of the property is now only $2m ($100,000 / 5%). So you've lost a massive amount of value - plus your property will be gutted out by the commercial tenant since they need space for offices/shop etc.
To make the commercial security equivalent to the resi one with that cap rate, the commercial rental has to be about $170,000 pa. Is that achievable? If not, then it is a bad idea.
Thanks Aaron. I have heard the concept, never knew what it was called. Have you seen cases where it WAS justifiable?
Thanks Aaron. I have heard the concept, never knew what it was called. Have you seen cases where it WAS justifiable?
Yes. Only in places like main/busy roads that have bad residential values for obvious reasons.
Yes but why would you bother? For me, I would only do it if the commercial rental I get is massively higher than an equivalent resi one. This is because as soon as it is commercial its value is crunched by a higher capitalisation rate which can only be counteracted by a much higher rent.
Thanks for the reply. Essentially my rental yield as a resi property will be somewhere around the 5% , maybe just over.
I am trying to get the best use/return on the place (rental returns really). I may have the opportunity to build in under the house. I'm told I can't build a separate unit/flat here in Brisbane. So it leaves me to create a bigger house, or a small commercial office under the existing house. My thoughts were that the returns would be higher on the commercial, plus it also means two different sources of income (not reliant one individual to cover all costs.
What what I understand from what Aaron was saying is that once a place is commercial the value of the property may not be as high - so the increased yield comes at a devastation of capital growth plus even difficulty in resale and finance because of the combo? I quite liked a shop and resi place and got some advice about how it all plays out and why those places are worth less than a straight resi property and that's how I understood it?
